An entrepreneur and investor walk into a bar. The entrepreneur hands the investor an NDA. The investor walks out.
Ever meet an entrepreneur who is so excited about his idea but won’t share anything until you sign an NDA? Or maybe you’re that entrepreneur. It’s common, but also very unnecessary. We’re here to tell you that you should share your idea with as many people as possible to receive market feedback and validation. Time and again, we meet a client who develops his idea in a cave. Only to emerge one year later and find out the market actually doesn’t care about the product or service. NDAs have a time and place, but you don’t have to make everyone you meet sign one just to share your brilliant idea.
Let’s get to the point. Who signs NDAs? And when?
At Rubicon, we approach NDAs in two tiers:
1. Share general information without an NDA.
You should shout from the rooftops, take experts to coffee, and share your idea with your target customers to gain feedback and create the best possible product/service on the market. Determine what information you’re happy and comfortable with sharing without a confidentiality agreement.
What is general information?
- The problem you solve;
- Your 12-month goals;
- The market scope;
- Your business plan;
- The potential target customers; and
- Your team
If a followup conversation presents itself, then you should consider bringing an NDA into the mix.
Never present an investor with a nondisclosure agreement right off the bat. Like our joke at the beginning of the blog post, the investor will walk out on you or at least laugh in your face. Investors won’t sign NDAs because they meet with hundreds of businesses each year. If investors sign an NDA for all companies, they subject themselves to liability in the future. For example, if they meet with a dog walking startup in January and sign an NDA but don’t invest, and in August they invest in a different dog walking startup, the January startup could sue the investors for a potential breach of the NDA.
You should share your idea with everyone (and their mom) to get market validation, establish feedback loops, and iterate your product/service to meet the market’s demands. If an investor wants the specific information, it is a case-by-case basis on whether or not you should include an NDA in the discussion.
2. Under an NDA, disclose specific information.
This is where the exceptions come in. Who should you not share detailed information with? Competitors and potential acquirers. Often times, without an NDA (and sometimes even with one) these conversations become phishing expeditions where the company is just searching for your secret sauce.
What is specific information?
- Financial statements
- Your secret sauce
- Algorithms and code (if a software company)
- Anything nonpublic that is very proprietary
Remember the TiVo and Dish Network intellectual property fight? TiVo made Dish Network sign an NDA. Dish made a business decision to reinvent TiVo’s technology for its own service, and not acquire TiVo. The settlement? $500 million.
Don’t be afraid to take a meeting without an NDA. There are exceptions, but there isn’t a clear line as to how effective an NDA is, anyways. Of course, as good lawyers will tell you, when you are sharing information, don’t disclose everything under the sun; instead, disclose information carefully and thoughtfully. Ready for more dos and don’ts? Read our blog post, 10 Legal Failures That Can Lead to Startup Death.
